Earlier today, some hilarious news hit the tape after it was made public that disgraced CDO trader Wing Chau has decided to go nuclear and sue Michael Lewis and Steve Eisman due to their all too honest representation of the Harding Advisory asset manager, in Lewis' book "The Big Short" (not spared from the lawsuit was even book publisher W.W. Norton). "Michael Lewis was sued by Wing Chau, president and principal of Harding Advisory LLC, who accused the writer of defaming him in his 2010 book. The book "depicts Mr. Chau as someone who ignored his professional responsibilities, made misrepresentations to investors, charged money for work that was not performed, had no stake in the CDOs he managed, was incompetent or reckless in carrying out his responsibilities, and violated his fiduciary duties by putting the interests of 'Wall Street bond trading desks' above those of his investors." It appears that Chau missed at least one additional defendant: Jody Shenn of Bloomberg, who in 2010 wrote a scathing article titled "How Wing Chau Helped Neo Default in Merrill CDOs Under SEC View" which provided just as damning and just as accurate a portrait of the (allegedly) pathologically greedy manager who presided at the "center of an epidemic of conflicts of interest." And while we present the key highlights from Shenn's piece which is a must read for anyone interested in what will surely be a recurring drama in the coming months (the Michael Lewis op-ed repartees will be worth the price of admission alone), what appears to have forced Chau to take this career ending step (sorry Wing, no more AUM for you) is that he is about to hit the silver screen. In the full lawsuit we read that "Brad Pitt's production company, Plan B Entertainment Inc., has bought the movie rights and is working with Paramount Pictures Corporation to produce [The Big Short] film." Well isn't that special...

Here are some of the choicest quotes by Jody Shenn from his May 2010 article:

In early 2007, with subprime-mortgage defaults soaring, Wing F. Chau teamed with Merrill Lynch & Co. to create a $300 million pool of assets that shared a name with the main character in The Matrix movies who discovers reality isn’t what it seems.

Neo CDO Ltd. was a complex construction. More than 40 percent of its holdings were slices of collateralized debt obligations sold by Merrill, according to Moody’s Investors Service and Bloomberg data. Many of those were CDOs made up of other CDOs backed by bonds linked to home loans. About one-sixth of Neo was invested in junk-rated debt.

Eight months after the deal closed, Neo defaulted, wiping out most of its investors. It was one of seven transactions that Chau, 43, hatched with Merrill and Citigroup Inc. in 2007 as banks raced to offload mortgage assets, helping to make his firm, Harding Advisory LLC, the biggest manager of CDOs tied to risky mortgages and related derivatives issued that year.

Managers such as Chau were at the center of a financial machine that pumped out more than $200 billion of mortgage- linked CDOs in the months before the subprime crisis spread. They picked the securities that went into CDOs and held themselves out as independent agents. Now potential conflicts of interest and questions about what banks disclosed have drawn regulators’ attention.

Interactions across the industry among bankers, asset managers, ratings firms and lawyers contributed to what Lang Gibson, head of CDO research at Merrill until early 2008, called a “Ponzi scheme” of CDOs buying other CDOs.

“It was the most incestuous market around,” Gibson said.

...

Chau said that more than 80 firms, including BlackRock Inc., TCW Group Inc. and Fidelity Investments, managed CDOs created in 2007 and that “the number and the prominence of the firms participating in the CDO industry” shows there wasn’t a consensus that the housing market was in trouble.

...

Chau, who told colleagues that he grew up in Rhode Island where his family owned a restaurant, started his career as a junior analyst at Prudential Securities and then at Salomon Brothers, where he wrote reports on the bonds spawned during a boom in subprime lending in the 1990s. He also has a master’s degree in finance from Babson College in Wellesley, Massachusetts.

He joined New York Life Insurance Co. as a portfolio manager in 1999 overseeing asset-backed securities and commercial mortgage bonds, and helped create the company’s first CDO filled with asset-backed debt, according to CDO prospectuses. He later worked as a securities trader at French bank Societe Generale and Tokyo-based Nomura Holdings Inc.

In 2004, Chau moved to New York-based Maxim Group, where he started a CDO unit. While there, he helped create four CDOs underwritten by Merrill, including the $485 million Lexington Capital Funding Ltd. in October 2005, his first tied to low- rated securities.

...

Chau stood to make money for awhile even if the CDOs he managed didn’t return principal to investors. His fees ranged from at least 0.09 percentage point of assets a year for CDOs filled with high-rated bonds to at least 0.17 percentage point for those with lower-rated debt, according to prospectuses

At a dinner at a securitization conference in Las Vegas in January 2007, the same month the Neo marketing document was dated, Chau met with Steven Eisman, who ran a hedge fund at Frontpoint Partners LLC that was betting against subprime loans.

Chau thanked Eisman, saying he would have less to buy if people weren’t shorting the market, according to two people familiar with the conversation. The comment, a reference to Harding’s investment in derivatives as well as bonds, helped convince Eisman that the companies taking on subprime risk were relying on conflicted CDO managers serving mainly as fronts for banks, the people said.

The bottom line.

About $6 billion of Harding’s CDOs have been liquidated, cutting off
management fees, according to RBS data. An additional $7.4 billion also
have experienced events of default, ending Harding’s fees in certain
deals. Harding was managing $4.1 billion of assets as of April 15,
according to the firm’s SEC registration.

And on to important things: such as the release date of the Brad Pitt production of "The Big Short"...

"Morgan Stanley experienced a “very sensitive” break-in to its network by the same China-based hackers who attacked Google Inc.’s computers more than a year ago, according to leaked e-mails from a cyber-security company working for the bank."

I think Brad Pitt would be smart to treat the movie rights to this book as a trade and not an investment. Finance drama just doesn't translate very well onto the silver screen. Wall St. may have spawned a whole generation of Gordon Gecko imitators but I don't think the movie was a smashing success at the time (and I have always been a bit underwhelmed by it frankly).

Trading Places, on the other hand, is fantastic as a comedy and the finance drama there is more of a plot device than the central focus of the movie. Steve Martin once said that when he was starting out, comedians were all about Vietnam and Watergate and race relations. He figured that eventually people were going to get tired of that political stuff and when they did, he was going to be there...and he was going to be silly.

With the very big caveat that there just might not be an afterwards this time around, I think something similar is going to be required to turn the financial shenanigans of the naughty oughties into box office gold.

i agree that "money as evil" is a tough sell because "we already know that." black comedy can be good--but satire can be self-defeating. "it's not serious because it's not serious." I like Shakespeare's "Hamlet" of course since "the play's the thing wherein' i catch the conscience of the King." Of course "you need real talent" to pull that one off. In other words "it's a crime in real time" and "i have something to say about that." To the King himself tho? As he "sit's on his throne"? "Take me to your leader" Brad Pitt because "are you really willing to die for what you believe in"? There was one great director who did that--his name was Orsen Welles and the movie was Citizen Kane. Good luck!

"depicts Mr. Chau as someone who ignored his professional responsibilities, made misrepresentations to investors, charged money for work that was not performed, had no stake in the CDOs he managed, was incompetent or reckless in carrying out his responsibilities, and violated his fiduciary duties by putting the interests of 'Wall Street bond trading desks' above those of his investors."

Shit man! That's a heck of a good resume! I'll bet Goldman Sucks got their eye on him! That's the kind of people they look for!!!

"The book "depicts Mr. Chau as someone who ignored his professional responsibilities, made misrepresentations to investors, charged money for work that was not performed, had no stake in the CDOs he managed, was incompetent or reckless in carrying out his responsibilities, and violated his fiduciary duties by putting the interests of 'Wall Street bond trading desks' above those of his investors."

Is that it? I mean, is that the prosecutions best shot? ... Hank Paulson would put Chau in the shade ... No contest ... Paulson had the nads to waltz into CONgress with a couple of sheets of bs scribbled on note pad paper and convince the uber clowns that the world would stop turning if they didn't cough up $800 Billion in a day or two. Compared to Paulson, Chau is a Boy Scout.

Paulson also told the US Gov that he would not take the job as Treas Sec unless his earnings at GS and future earnings were tax free. No one has ever gotten a total pass on income taxes to my knowledge.

"His fees ranged from at least 0.09 percentage point of assets a year for CDOs filled with high-rated bonds to at least 0.17 percentage point for those with lower-rated debt, according to prospectuses."

That's what always got me. He was making more money peddling shitty wares than good ones and didn't have enough skin in the game for him to care if they ultimately blew up.

In business you should always try to analyse the incentives the other party has. One glance at those should tell you to be careful.

A friend of mine went to high school with Brad. She was into acting and very involved with the high school plays. They spent 4 years trying to talk Brad into trying out. He said he wasn't interested...yet, he would sit in the back of the auditorium and watch all the rehearsals. My friend lost touch with Brad when she moved to New York. She did see him again...when she went to see Thelma and Louise.

I can only guess that our very own Tyler got tired of watching rehearsals, too.

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